Is Auditor Rotation Coming?

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Most everyone agrees the audit process should be improved, but hardly anyone agrees on how it should be done. The Financial Accounting Standards Board, the American Institute of Certified Public Accountants, and both parties in Congress have their own agendas, so real reform seems to be a long way off.

The Corporate and Auditing Accountability, Responsibility, and Transparency Act of 2002, authored by Rep. Michael Oxley (R­-Ohio), would create a five-member public regulatory board answering to the Securities and Exchange Commission, to review and discipline accountants. The bill would also limit auditors’ ability to provide certain additional services. It has already been passed by the House of Representatives, but it may have a harder time passing in the Senate, where the Democrats have a one-vote majority.

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The Democrats are pushing for more-stringent reform. The Investor Confidence in Public Accounting Act of 2002, introduced by Sen. Christopher Dodd (D­-Conn.) and Sen. Jon Corzine (D-­N.J.), would also create an independent public accounting board, but would further limit auditors’ ability to provide consulting services. House Democrats are proposing legislation to require companies to rotate auditors every four years.

“If the Democrats pass their bill in the Senate, it could be a showdown,” says John Coffee Jr., a finance professor at Columbia University. Whether reform becomes law “will depend largely on if they can reach a compromise, and that can be tough in an election year,” he adds. Coffee says if it does pass, there will need to be lots of concessions on both sides.

Accounting bodies and finance executives have criticized reform proposals by both parties. FASB, which supports reform, worries that some changes could jeopardize its independence. The AICPA favors public regulation of public-company auditors with SEC oversight. “We think that would go a long way in helping to restore confidence in public-company audits,” says James Castellano, chairman of the AICPA. The institute also proposes a greater role for audit committees, more timely disclosure, and laws against misleading auditors.

Olivia Kirtley, chair of three audit committees and a former CFO, says the auditor-rotation requirement would be “the worst thing that could happen. The highest risk of failure is in the first or second year.” Companies, she argues, need auditors that know their businesses.